FDI drop due to global factors

Experts say country should focus on improving business environment

Foreign direct investment in China fell for the sixth straight month in April. There were many reasons for the decline, which analysts said was mainly due to the European debt crisis and the sluggish global economic recovery.

As the United States and European countries are trying to attract more foreign capital, people have started to wonder: will the competition from those countries also affect China's inward investment?

Some experts from the US and Europe do not think that the rise in US and EU FDI inflows has directly led to the decrease in China.

China should not worry too much about the slowing FDI growth rate, but should focus on restructuring its economy and improving the investment environment, they said.

"The attraction for FDI in China differs from that in the US and EU. A large amount of FDI inflow to China is linked to the country's export sector, while much FDI inflow to the US and EU is aimed at serving the domestic market. They are not easily interchangeable," said Ting Xu, senior project manager at Bertelsmann Foundation, a German think tank.

China still ranks higher than the US and Europe in FDI confidence, according to the Kearney FDI index, she noted.

"This is not to say that it is not possible to have FDI diversion among the US, EU and China.

"When the Chinese market's attractiveness to FDI inflows becomes similar to those of the US and EU, then the rise of FDI in the US and EU might lead to a decrease in China. This is not the case right now."

Raymond Cheng, CEO of SoZo Group, an advisory firm focusing on Chinese investment in the US, noted that the US is becoming more attractive for foreign investment due to the cost gap being narrower, attractive incentives, a stable political system and a mature legal environment.

To create more jobs, the Obama administration has initiated several programs to draw investment to the US, such as setting up SelectUSA, a government-wide effort to encourage, facilitate and accelerate business investment in the US.

Local governments have made their own approaches. In addition to overseas trade missions led by state governors, Alabama passed a bill in July to provide Chinese enterprises investing in the state with tax subsidies to offset the costs incurred from anti-dumping duties levied by the US.

Called the Made in Alabama Job Incentives Act, the bill will apply to any non-US business (excluding non-industrial sectors such as finance) with an investment project of more than $100 million and that creates at least 100 local jobs.

Though facing competition from the US, China can still expect more foreign capital in coming years, Cheng said.

"China's FDI is slowing primarily due to structural changes in the fundamentals of the global economy and changes in the country's FDI policy," he said.

According to the Ministry of Commerce, the nation's FDI dropped by 2.8 percent from a year earlier to $29.5 billion in the first quarter. In March, FDI fell 6.1 percent from a year earlier to $11.76 billion.

"I believe the downshift is temporary. Some of the industrial sectors in China will see a steep decline in FDI, while others will see a significant increase, and as some of the key industries move upstream and global economies recover, China will see a significant increase in FDI," Cheng said.

China is the world's second-largest recipient of foreign investment. Its economic success has mainly been built on foreign capital and technology in the past three decades.

But now FDI plays a different role in the Chinese economy than it used to, said Derek Scissors, an expert on the Chinese economy at Heritage Foundation.

"Fifteen years ago, China needed foreign capital. It no longer does," he said.

"Now China needs foreign technology, expertise and ideas. These are tremendously valuable but they do not require increasing amounts of money. China could receive a bigger boost from FDI this year and beyond, even though the amount is falling, as long as FDI brings with it new knowledge."

At the recent World Investment Forum in Doha, Qatar, Doha Bank Group CEO R Seetharaman gave an overview of global FDI inflows.

The inflows rose by 17 percent in 2011 to $1.5 trillion to reach a new global high. FDI inflows to China rose by 8 percent, FDI inflows to Europe increased 23 percent and FDI inflows to the US declined by 8 percent, he said.

He also noted that Southeast Asian countries, such as Indonesia, Malaysia and Thailand, have also attracted good amounts of FDI.

"Europe's need for money is drawing, and will continue to draw, funds away from China, as well as the rest of the world," said Scissors from the Heritage Foundation.

"China, therefore, needs to improve its FDI policies, as do the US and many others."

tanyingzi@chinadailyusa.com